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How Do HSA Accounts Work?

How Do HSA Accounts Work?

April 05, 2022
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The rise in healthcare costs has been a growing concern for most Americans for decades. In fact, about 42% of Americans surveyed say they are worried they won’t be able to pay for necessary medical care within the next year. (1) Even if you have comprehensive health insurance, there is a risk that an unexpected medical emergency could bleed your emergency fund dry. 

Thankfully, using a tax-advantaged health savings account (HSA), you can alleviate excessive healthcare costs. At 1on1 Financial, we want you to understand the benefits and disadvantages of opening an HSA so you can decide if it’s right for you. 

HSA Benefits

One of the strongest arguments for opening up an HSA is it allows you to lower your federal income taxes by making tax-free deposits into your account. Because tax hasn’t been taken out, you end up with more to contribute. Many people have their HSA money withheld directly from their paycheck so that they never even see it or have to pay taxes on it. However, you don’t have to have it automatically withheld—you can just take a deduction when you file your taxes for the same result. Either way (saving now or saving later) you still save on taxes by contributing to an HSA.

Depending on the account, some HSAs also invest the money you contribute in mutual funds,  ETFs, or other stocks. The earnings that you make from the HSA are also tax-free as long as you withdraw the funds to pay for medical expenses. (2)

A Retirement Planning Strategy

While many people use their HSA funds to pay for current out-of-pocket medical expenses, you can also maximize your contributions, letting them grow for use in retirement when you’ll likely need them most. HSAs are a great complement to your other retirement savings accounts, allowing your IRAs and 401(k)s to cover regular living expenses. In this way, your HSA acts as a contingency fund earmarked just for health costs. Why wouldn’t you just stick with traditional retirement accounts? Because an HSA receives better tax treatment than any IRA or 401(k), it can be a powerful way to help maximize your nest egg. 

What Do I Need to Get Started With an HSA?

To qualify for an HSA, you must meet the following requirements: (3)

  • Be covered under a high-deductible health plan
  • Have no other healthcare coverage
  • Not be enrolled in Medicare
  • Not be claimed as a dependent on someone else’s tax return

As of 2022, an individual who has an HSA can contribute up to $3,650 per year and $7,300 for family coverage (about a 1.4% increase from 2021). Individuals who are over the age of 55 can make additional catch-up contributions in the amount of $1,000 per year to their HSAs. (4)

HSA Withdrawals 

You can use the money you deposit in your HSA to pay for medical expenses before you meet your deductible on your HDHP. Such medical expenses include the usual healthcare costs, such as deductibles, copayments, and vision and dental expenses. But you can also use it to pay for non-traditional medical costs, such as acupuncture or chiropractic visits. Additionally, you can use the account to cover medical costs for your immediate family members or spouse even if they are not under your HDHP. (5)

One of the most beneficial attributes of HSAs is that the funds roll over from year to year, which means that these tax-free funds can grow with interest for many years. Once you reach the age of 65, you can withdraw the funds without a penalty and use them on non-medical expenses; however, you will pay income tax on the funds if you use them in this way. If you are enrolled in Medicare, you can use HSA funds to pay for Medicare premiums. (6)

Potential Disadvantages of HSAs

There are many advantages that HSAs offer, but they do not make sense for every family and every situation. 

It goes without saying that illness can be unpredictable and, therefore, it can be hard to budget for healthcare expenses. Also, it is worth noting that you cannot use HSAs to cover Medigap premiums without paying taxes. (7)

The Bottom Line

When setting up a health savings account and deciding the best way to use it, it’s important to work with a knowledgeable and experienced financial professional who can walk you through the fine print. If you want to know more about HSAs and how to make the best choices for your money and your health, our 1on1 Financial team is here to help! Call our office today at 909-981-1720 or simply click here to schedule a free 15-minute introductory phone call!

About 1on1 Financial

1on1 Financial is an independent financial advisory firm specializing in guiding working and retired professionals, executives, and business owners along the path to financial well-being. Founded in 1997, we use a team approach to help our clients accumulate wealth, generate income, preserve their life savings, and strategically plan for the distribution of their estate. With more than 50 years of combined experience in the financial services industry, we remain true to our fundamental mission: to provide personalized guidance, treatment, care, and service so our clients can gain control of their future and feel confident in their financial life.

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(1) https://thehill.com/policy/healthcare/585648-nearly-one-third-of-americans-skipped-care-in-past-three-months-due-to-cost

(2) https://www.investopedia.com/articles/personal-finance/091615/how-use-your-hsa-retirement.asp#:~:text=Benefits%20of%20an%20HSA,-Your%20contributions%20to&text=Withdrawals%20for%20qualified%20medical%20expenses,the%20funds%20are%20being%20used.

(3) https://www.irs.gov/publications/p969#en_US_2018_publink1000204023

(4) https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-2022-hsa-contribution-limits.aspx

(5) https://www.investopedia.com/articles/personal-finance/082914/rules-having-health-savings-account-hsa.asp

(6) https://www.goodrx.com/insurance/fsa-hsa/hsa-to-pay-insurance-premiums

(7) https://www.irs.gov/pub/irs-pdf/p969.pdf